I was once a Buy-and-Holder. I have great respect for my Buy-and-Hold friends, who I find to be smart, hard-working, good people. I believe that the Buy-and-Holders have made many important contributions to our understanding of how stock investing works.
Buy-and-Hold Only Subtracts
I also believe that Buy-and-Hold is a dangerous strategy, that, in the event that stocks continue to perform in the future anything at all as they have always performed in the past, will bring on another economic crisis in the not-too-distant future. Buy-and-Hold was a plausible idea and I am glad that we gave it a try. But, today, my assessment is that Buy-and-Hold adds nothing, it only subtracts.
Q2 2022 hedge fund letters, conferences and more
The reason why I was once a Buy-and-Holder is that the strategy is promoted as being rooted in peer-reviewed research and that’s what I was looking for. The tricky thing about rooting an investment strategy in peer-reviewed research is that there’s always new research being published. There comes a time when a strategy that was once thought to be research-based no longer is. In the days when the Efficient Market Theory was widely accepted by academics, Buy-and-Hold seemed like the ideal strategy. Today, those days are 41 years in the rear-view mirror. Shiller published his Nobel-prize-winning research showing that valuations affect long-term returns in 1981.
Would we have been better off if Buy-and-Hold had never come down the pike?
A case can be made that that is so. I have been talking these matters over with stock investors for 20 years now. Not once in that time has a Buy-and-Holder explained how it could be that market timing wouldn’t work in a world in which the value proposition of stocks changed with changes in valuation levels. In that sort of world (the world that we live in), it is not possible for investors who refuse to engage in market timing to maintain the same risk profile over time.
Yet the Buy-and-Holders continue to maintain that market timing doesn’t work. They say that all the time. We obviously couldn’t have the CAPE value that applies today (32) if that were not so. In a world in which Shiller’s research were regularly discussed in conversations about stock investing, investors would be aware that stocks possess less appeal when prices reach crazy high levels and they would lower their stock allocation in response to increases in the CAPE value. The result would be more reasonable stock prices. Stock prices would be self-regulating in a world in which investors were well-informed about what the peer-reviewed research says.
Market Timing
Buy-and-Hold is the problem. There is little (no?) intellectual support for the “idea” that market timing is not required. But there is a mountain of institutional support for the idea. People who market themselves as “experts” once believed that. If only they had changed their tune when the new research was published, there would have been no problem. People obviously make mistakes from time to time. So what? It’s through a process of discovering our mistakes that we learn new things. The investment advice field got off track when we discovered our error in 1981 and didn’t immediately correct it. Now it would look really bad for the Buy-and-Holders if we did so. How can someone refer to himself as an “expert” if he is 41 years behind in his reading of the peer-reviewed research?
It’s a mess.
I believe that things will be set straight when today’s crazy prices produce the next economic crisis (when millions of people lose a large portion of their life savings in a price crash, they pull back on their spending and hundreds of thousands of businesses fail). For now, Buy-and-Hold is holding us back. I have spoken to a good number of experts in this field who long for the day when they will feel free to offer solid, research-based investment advice. But, for now, the more important thing is not to tell on the Buy-and-Holders. Those who violate that rule are disappeared from the most popular web sites and television programs.
Buy-and-Hold was a fine idea once upon a time. I wonder if Shiller would have even been provoked into performing his amazing research if he hadn’t felt a need to check out the claims of the Buy-and-Holders and to respond to them. Today, it’s a once fine idea that has hung around far, far too long. Today, Buy-and-Hold adds nothing but only holds us all back from achieving hugely important advances in our understanding of how stock investing works. Today Buy-and-Hold only subtracts.
Rob’s bio is here.
